We’ve been discussing the problems in the Italian debt market at NOTES FROM UNDERGROUND for many years but with the Five Star/Lega coalition coming into government many of the issues that were once theoretical are now an increasing possibility. The Five Star group is openly proposing a debt restructuring for Italy in the hopes of spurring growth and improving the Italian unemployment situation. Economic growth in Italy has lagged the developed world economies and none more so then its neighbor, Germany.

On May 16, Peter Boockvar and I had a conversation about how we need to pay attention to geopolitical events, as well as the overhanging debt crisis that’s beginning to disrupt the complacent markets. Enjoy.

Everything in global financial crisis emanates from too much debt being unable to be serviced. The current situation in Argentina is that the state and private sector borrowers won’t be able to pay the INTEREST on its dollar-based loans as the PESO weakens. It takes more domestic currency to purchase the needed dollars to pay creditors, resulting in a NEGATIVE FEEDBACK LOOP that brings the economy to a crawl as all the economic actors have to find ways to pay the interest costs or go bankrupt. The Argentinian government won’t go bankrupt. But it will force a debt restructuring if its borrowing costs move higher (yet another burden for a debt-plagued economy).

*NOTE: THERE IS NO POLITICAL VIEW IN THIS BLOG (AND SPECIFICALLY IN THIS POST) I ascribe to the wisdom of Deng Xiaoping. To paraphrase: Quality analysis doesn’t care if the “cat is black or white,” only if it catches mice.

It is far too early in the situation circling the emerging market debt to make a prognosis. The financial media is filled with stories about the rising U.S. dollar coupled with a FEDERAL RESERVE that is rising short-term rates while simultaneously enacting quantitative tightening (QT). This is certainly having an effect upon global liquidity but at this point I would caution about the CONTAGION and fallout from this process, especially as the ECB and BOJ still are adding liquidity while standing ready to increase their QE if economic growth begins to falter. My phone and internet haven been inundated with questions about the Argentinian central bank raising short term rates to 40 percent. The Argentinians are in the middle of a reform process that is causing major disruptions in their economy, in addition to a severe drought that is having a major impact on the economy, especially for one relying on the agricultural sector.

On Wednesday, I had the great pleasure of talking with David Rosenberg, one of the most prominent financial analysts of the last 30 years. As moderator Richard Bonugli sets the tone, the conversation covered many of the topics discussed in Notes From Underground throughout the past year. The power of podcasts can provide so much information in a condensed format, which would take 100 posts to reproduce. Enjoy the discussion and recognize that this was recorded three hours before the release of the FOMC statement.

While waiting for the FOMC‘s rate decision on Wednesday, I am posting a new PODCAST in which I discuss the global macro situation with a woman who whose work I had not been familiar. Nomi Prins has written a new book called Collusion, in which she investigates the role of central banks in its current predicament. I thoroughly enjoyed the 51-minute podcast as Richard Bonugli does a fine job of allowing the guests to discuss in deep detail. I will certainly be buying the book (it was released Tuesday) as it explains in detail what the central banks have accomplished in destroying the signalling mechanisms of capitalism and markets. The Financial Repression Authority has been an important platform for allowing deep discussion on matters of global investment concerns. Enjoy the discussion as I await my readers feedback on the issues we covered and hope it will lead to profitable trade opportunities.

As T.S. Eliot warned in The Wasteland, April is the cruelest month, as the thaw of winter gives way to hope as the world returns to rejuvenation. April has delivered the first quarter corporate results and it is no exaggeration to state that revenue and earnings have exceeded expectations. However, the equity market results have failed to respond to the robust numbers as the SPOOS have gained a mere 1.25% and remain unchanged on the year. The NASDAQ 100 has been a much better performer as the TECH sector continues to cruise.

In building on the discussions in Tuesday’s POST it is important to note that the debt discussion that has taken place in Notes From Underground is gaining traction as an important piece of the financial narrative. The failure of the SPOOS, NASDAQ, and DOW to gain traction with the robust earning releases is forcing the perplexed to confront the impact and collateral damage from Ben Bernanke’s Portfolio Balance Channel, also known as QE or large-scale asset purchases.

The concentration of the media on round numbers is going to drive me to drink that bottle of Pappy Van Winkle. In true philosophical inquiry, round numbers never fit in the square pegs of the unbalanced thinking at Notes From Underground. In Tuesday’s post I am going to run through several points that I’ve mentioned over the past several months. All of these issues will have some relation to the developing narrative that we are experiencing in the markets: